NFLX Surges 25%: Bulls Cheer Original Programming, Price Targets Zoom

By Tiernan Ray

Shares of Netflix (NFLX) are up $43.84, or almost 25%, at $218.21, continuing to add to gains since last night’s rally following a report of better-than-expected Q1 results and a better-than-expected Q2 outlook.

My colleague Brendan Conwaychimes in this morning with the interesting observation that the removal of Netflix shares from the Nasdaq 100 several weeks ago turns out to have been an excellent buying opportunity given the surge in the shares since then. Netflix stock is up 115% in the last 12 months and 136% this year to date.

The bulls today are especially enthusiastic about what they deem as the success in the quarter of the company’s original programming, such as “House of Cards,” given the better-than-expected 2 million subscribers added in the domestic streaming video business.

There are no out-right ratings changes this morning, that I can see, but price targets are zooming upward all around. Revenue numbers are generally going higher for this year and next, both among bulls and among bears, as is Ebitda, in most cases, but profit per share is going lower, reflecting higher content costs, and you’ll notice there’s a fairly wide disparity in EPS estimates:

Bullish!

Doug Anmuth, J.P. Morgan: Reiterates an Overweight rating and raises his price target to $254 from $205. Anmuth raised this year’s outlook to $4.35 billion in revenue from a prior $4.33 billion, but cut his ESP estimate to $1.29 per share form $1.58, while trimming his operating income margin to 3.9% from 4%, and trimming his Ebitda estimate to $286 million from $293 million. “We believe Netflix has increasing leverage with content providers and original content is off to a strong start, with House of Cards driving high engagement and likely improving retention, Hemlock Grove seeing strong viewing in its first weekend, and Arrested Development coming in late May. We believe the virtuous cycle of more subscribers and better content is once again in effect for Netflix.”

Scott Devitt, Morgan Stanley: Reiterates an Overweight rating and raises his price target to $235 from $200, while raising his “We believe continued tablet penetration and House of Cards were both tailwinds […] Netflix added (vs. the market’s view of renting) 2MM subs. In our view, this proves that original content is accretive, and we expect that as Netflix introduces new series that they will yield strong incremental sub growth / lowered churn. We are modeling CQ2:13 subs at 29.7MM.”

Heath Terry, Goldman Sachs: Reiterates a Neutral rating, and raises his price target to $210 from $184. Terry raised his 2013 estimate to $4.43 billion in revenue, $305 million in Ebitda, $1.54 in GAAP EPS, and $2.45 per share in adjusted EPS from a prior $4.35 billion, $276 million, $1.12 per share, and $2.06 per share. “etflix commented on the early strength of its new original content, its declining willingness to make bulk, non-original content deals, and its intent to begin offering a four-stream plan for $11.99 for multi-user subscribers. As the company’s subscriber base scales against content costs (particularly from investment in unique original content), international losses moderate, and ARPU grows, we see margin expansion and earnings growth likely exceeding management’s guidance. That said, with the stock already trading at a significant premium to the sector, with relatively similar growth and a higher risk profile, we remain at Neutral.”

Anthony DiClemente, Barclays: Reiterates an Equal Weight rating on the stock, and raises his price target to $220 from $190. DiClemente raised his 2013 revenue estimate to $4.28 billion from $4.22 billion, and cut his EPS estimate to 89 cents per share from $1.09 per share, and raised his Ebitda estimate to $194 million from $164 million. “We think the premieres of Hemlock Grove on 4/19 and Arrested Development on 5/26 could help 2Q and possibly 3Q subscribers much in the same way that House of Cards helped 1Q subscribers. Incremental revenue is helping to drive margin upside, and Netflix remains committed to improving its domestic streaming contribution margin by 100bps every quarter. We have increased our 2013 domestic streaming estimates due to higher subs and contribution margin. Internationally however, we have increased marketing expenses as Netflix indicated it plans to launch in an additional European market during 2H13.”

Steven Frankel, Dougherty & Co.: Reiterates a Neutral rating, and raises his 2013 view to $4.38 billion in revenue and $1.81 per share in profit from a prior $4.29 billion and $1.07 per share, or $2.62 excluding stock-based compensation. He raised his 2014 estimates as well. “The company certainly has momentum, but with margins remaining under pressure due to international expansion, we can’t make the valuation case to chase the stock here. Netflix remains the 800-pound gorilla in streaming video but the business still faces cost pressures and competitive threats so despite the Q1 progress we are remaining on the sidelines until the path to double digit operating margins becomes clearer.”

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.